Uncertainty and Economic Activity: A Multicountry Perspective

Abstract

We develop an asset pricing model with heterogeneous exposure to a persistent world growth factor to identify global growth and financial shocks in a multicountry panel VAR in volatility and output growth. The econometric estimates yield three sets of empirical results about (1) the importance of global growth for the interpretation of the correlation between volatility and growth over the business cycle and the possible presence of omitted variable bias in single-country VAR studies, (2) the extent to which output shocks drive volatility, and (3) the transmission of volatility shocks to output growth. Authors have furnished data, code, and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.

Assessing international commonality in macroeconomic uncertainty and its effects

“…Some other analyses have assessed international comovement in financial uncertainty. Using data on realized stock return volatility and GDP growth in 33 countries, Cesa‐Bianchi, Pesaran, and Rebucci () show that return volatility is much more correlated across countries than is GDP growth, that global growth has a sizable contemporaneous impact on financial volatility, and that a common factor accounts for the bulk of the correlation between return volatility and growth. Casarin, Foroni, Marcellino, and Ravazzolo () propose a Bayesian panel model for mixed frequency data, with random effects and parameters changing over time according to a Markov process, to study the effects of macroeconomic and financial uncertainty on a set of 11 macroeconomic variables per country, for a set of countries including the USA, several European countries, and Japan.…”

Global Flight-to-Safety Shocks

“…This paper contributes to the active literature investigating the global macroeconomic implications of financial shocks and global financial cycles (Uribe and Yue [2006], Akinci [2013], Rey [2015], , , Obstfeld et al [2019], Kalemli-Ozcan [2019], Cesa-Bianchi et al [2019], Miranda-Agrippino and Rey [2020]). This issue has received renewed attention in light of deep global financial integration occurring over the past two decades, and the concerns raised over global financial stability.…”

“…This way, my work ties the literature on global financial cycles to that on flights-to-safety and risk-on/risk-off (Caballero and Krishnamurthy [2008], Beber et al [2014], De Bock and de Carvalho Filho [2015b], Caballero and Kamber [2019], Baele et al [2019]). On the development and measurement of financial shocks, my work also relates to Gilchrist and Zakrajsek [2012], and Cesa-Bianchi et al [2019], all of which introduce new, yet different measures of financial shocks, quantifying their macroeconomic impact. While the former two focus on country-specific measures of external finance premia, the latter develops a global measure of financial volatility.…”

“…Additionally, in modeling emerging market dynamics I allow for country-specific heterogeneity, thereby estimating both average pooled effects a la panel VARs while also showing that the effects of flight-to-safety shocks vary widely across countries. My modeling approach follows similar methods applied in Fernandez et al [2017] and Cesa-Bianchi et al [2019], the former quantifying the contribution of world commodity shocks and the latter studying the impact of global uncertainty shocks. Both allow for country-specific heterogeneity and highlight its importance.…”

“…Theoretically, global flights-to-safety may arise from unexpected news shocks to beliefs over global demand (Jaimovich and Rebelo [2009], Barsky and Sims [2011], Kurmann and Otrok [2013]) or shocks to global risk appetite or uncertainty (Bloom [2009], Fernández-Villaverde et al [2011], Christiano et al [2014] Alessandri andMumtaz [2019], Cesa-Bianchi et al [2019]. There is considerable theoretical and empirical evidence suggesting that news shocks and risk shocks are connected: large macroeconomic shocks arise from news shocks and endogenously generate time-varying risk premia (i.e.…”